Carbon Border Adjustments, Climate Clubs, and Subsidy Races When Climate Policies Vary

Author:

Clausing Kimberly A.1,Wolfram Catherine2

Affiliation:

1. Kimberly Clausing is the Eric M. Zolt Chair in Tax Law and Policy, UCLA School of Law, Los Angeles, California. Research Associates at the National Bureau of Economic Research, Cambridge, Massachusetts. Clausing is a nonresident senior fellow at the Peterson Institute for International Economics.

2. Catherine Wolfram is the William Barton Rogers Professor of Energy Economics, MIT Sloan School of Management, Cambridge, Massachusetts. Research Associates at the National Bureau of Economic Research, Cambridge, Massachusetts. .

Abstract

Jurisdictions adopt climate policies that vary in terms of both ambition and policy approach, with some pricing carbon and others subsidizing clean production. We distinguish two types of policy spillovers from these diverse approaches. First, when countries have different levels of climate ambition, free-riders benefit at the expense of more committed countries. Second, when countries pursue different approaches, carbon-intensive producers within cost-imposing jurisdictions are at a relative competitive disadvantage compared with producers in subsidizing jurisdictions. Carbon border adjustments and climate clubs respond to these spillovers, but when countries have divergent approaches, one policy alone cannot address both spillovers. We also consider the policy dynamics arising from carbon border adjustments and climate clubs; both have the potential to encourage upward harmonization of climate policy, but come with risks. Further, the pressures of international competition may result in subsidy races, with attendant risks and benefits.

Publisher

American Economic Association

Subject

Economics and Econometrics,Economics and Econometrics

Reference82 articles.

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